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Corporate Strategy - Air India

Corporate Strategy - Air India

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Published by: pavananandmr on Dec 28, 2009
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08/12/2013

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CORPORATE STRATEGY 
Air India : In Troubled Skies
The Indian national carrier is in a serious crisis and banking heavily on government-sponsoredrevival packages. But it may not be an easy flight ahead for Air India, as it is in the midst of violent cross winds.Air India (AI), the only domestic carrier that had retained domestic monopoly for a long time,has lost its dominant position in recent years—its losses mounted and market shareplummeted precipitously in the last two years. A string of problems starting from the botchedmerger with Indian Airlines, total management failure, lack of vision to develop responsivestrategies, a change in the long-term strategic situation, current market pressures and, notthe least, the high wage bill in the form of salary and incentives have placed the nationalcarrier in a spot of bother. Now it is crashing down in almost all areas. All the vital signs—productivity of technical personnel (two-fifth of international standard), employee-to-planeratio of about 210 employees, compared to an industry average of about 150, number of working hours per week of cabin crew (50-55 hours, compared with 70 in other airlines), tocite just a few—are indicating that the airline is suffering from chronic sickness. Now, AI iscontributing around 10% of global airline losses, with just 0.35% of global traffic, and virtuallyis in abyss.
"In the short-term, AI will retain a privileged position as long as thenational pride in seeing it as the nation's flag carrier remains. Over time,as competition on international and domestic routes increases, the basisfor government favoring one carrier over another will diminish. In the end,AI will simply be an Indian airline, indistinguishable from the otherairlines."Air India (AI), the only national carrier in India, is now in the red. Whathas led to the crisis at AI?Craig Lawrence:
The crisis at AI has been fueled by three factors: a change in thelong-term strategic situation, a failure to develop a responsive strategy, andcurrent market pressures.AI's privileged position in Indian aviation stands eroded in the new emergingstrategic situation. It had operated as the national carrier in a highly restrictedenvironment and thus, for a long time, retained its domestic monopoly. However, ithas been too slow in responding to competitive pressure from domestic playerssuch as Kingfisher and Jet. On international routes, it has struggled against moreservice-oriented foreign rivals, especially from the Gulf states.The absence of a responsive strategy is highlighted by a cost structure that hasremained bloated. For example, it has an employee-to-plane ratio of about 210employees, compared to an industry average of about 150. Also, the currentoverhang of a significant fleet purchasing/leasing program needs to be reviewedwhen there is a decline in passenger numbers.However, current market pressures associated with the wider crisis in India'saviation industry over the past year have pushed the carrier close to breaking
 
point. Plunging passenger numbers and soaring fuel prices led to crushingaccumulated losses in the past financial year.
Hans Huber:
 There is nothing new about the chronic lack of competitiveness of AIor substandard value to the customer. What is new, indeed, is the financial abyssinto which the carrier has been led by an apparent ineffectiveness in governanceand total lack of accountability.I don't think that the term `national carrier' bears much meaning in today's Indianaviation: the behavior of all three major airlines in India has become pretty muchthe same, at the least as far as the strategic directions of the firms are concerned.What is different with AI is the fact that it never returned any dividends to itsowner, the MoCA (Ministry of Civil Aviation). On the other hand, it repeatedly hasreceived significant cash infusions, credit guarantees, etc. These practices havebeen criticized by the Auditor General/ Chief Comptroller of India before, but, as wesee today, with no learning consequences for MoCA. Also, IPOs of AI had beenpromised by MoCA back in 2000, with renewed promises for autumn 2008, butnever materialized. Why should an IPO of AI in the coming years be any morerealistic, given that the situation both in AI and the financial markets has worsenedsignificantly since then? If, by comparison, private airlines such as Jet Airways orKingfisher burn their (or their shareholders') money, sooner or later the question of accountability will be raised. We can already see how previously flamboyant ownersof airlines now are downscaling their public profile. In the case of MoCA, ever-increasing infusions of money do not seem to present any problem. I don't knowany private airline (particularly if it is as poorly run as AI) that could ask for Rs8,000 from a private investor and stand a chance of obtaining it!
How do you see the merger of AI and Indian Airlines?Craig Lawrence:
The merger between AI and Indian Airlines has not beenimmediately successful. The marriage of an internationally-oriented carrier with adomestically-oriented one poses significant challenges. The key thing will bewhether the successful aspects of each carrier can be reflected in the other one. Inhindsight, it might have been better for AI to be taken over by a verycommercially-oriented carrier to allow that commercial focus to be rolled into theDNA of the nation's flag carrier.
Hans Huber:
 As my grandmother said, "Putting two sick people into the same beddoesn't make them healthy." The same reasoning may be applied to the ill-fatedmerger of Kingfisher/Air Deccan and, to a lesser extent, Jet Airways/Air Sahara. Allthese mergers were not done independently from each other, but needed importantbacking from the MoCA to go through. MoCA gave the green signal to all thesemergers within a couple of weeks (spring/early summer 2008), while applicants fornew operating licenses had been kept at bay for years. This fact alone speaksvolumes about the attitude of MoCA towards competition and equitable marketaccess to Indian aviation.Management consultants and `industry experts', many of them with links to tradeassociations or the industry/political nexus itself, wholeheartedly endorsed thesemergers. Synergies worth hundreds of crore rupees per year had been promised forthe merged AI/Indian entity. Barely a year thereafter, the consultants were gone,and the same `experts' remain silent. Integration of operations of both airlines hasbarely started, in spite of reduced demand for their respective services (whichshould make the integration exercise easier, including the layoffs of unproductivestaff, etc.) What the involved stakeholders (including unions) did agree on very
 
quickly was to buy brand new aircraft through apparently inflexible contracts to thetune of Rs 44,000 cr.This happened in an industry that usually acknowledges its cyclicality throughdealings in options prior to passing final orders. Any student of Econ 101understands the advantages of buying flexible tickets rather than betting the farmon a purchase worth thousands of tickets that would cover all your air travel for thenext 25 years, but without being able to exchange them! The easy part of themerger, i.e., some new marketing (including a code-share agreement withLufthansa), some rebranding, and new menus and cutlery can to a large extent beconsidered as window dressing. In particular, these measures did not provide anycost savings to the company and were not effective in making the passenger forgetthe higher prices he/she had to pay after the merger. AI's market share, which hadalready dropped to an all-time low of 15.1% by April-June 2008, is reckoned tohave decreased even further since then.Since `merger mania' in aviation is still considered a panacea by vested interests,but rarely by consumers or those without access to air traffic in the first place, whynot go all the way? How about merging Jet Airways with Kingfisher and AI? If thepreviously identified synergies had existed, the potential for cost savings amongthese carriers would be truly phenomenal: all three airlines have in the past beenremarkably unimaginative by mimicking each other's moves and present hugeoverlaps in their respective route structures. Anyone serious about improving boththe competitiveness and welfare gains of India's air traffic system should give thispotentiality some thought.
The government has gone all out to revive this ailing airline. How do yousee the government's efforts to reinvigorate AI?Craig Lawrence:
The government appears to have a twofold strategy. On the oneside, provide financial assistance to sustain operations, on the other, use thefinancial assistance to leverage change. I think this will only be successful if there isa root and branch change at the airline. This will involve several things: moreindependent directors with real, commercial expertise; a management team that isfinancially-savvy and recognizes that it is competing in an open marketplace ratherthan seeking government assistance; a unionized workforce that seeks to takemore commercial responsibility for the operation of the airline; an improved fleetthat reaps efficiencies from improved plane type commonality; more effectiveplanning of route structures; and, most importantly, a clear and distinctive valueproposition to offer to the international and domestic markets. It is not clearwhether the government's actions will actually drive all of these.
Hans Huber:
 As said before, government aid to AI (be it direct or indirect) hasbeen around for a long time. It may be worthwhile to compare the situation withthat of Indian Railways. Foreign scholars and consultants are trying to learn aboutthe remarkable transformation that has been achieved from within Indian Railways.This is unlikely to happen with AI under the tutelage of MoCA, which takes pride inhiring foreign consultancies to rehash old recipes from the US and elsewhere thathave not worked in their country of origin either. There are no plans from within AIor MoCA that could provide a blueprint for a fundamental transformation. All weknow is that AI will soon be hiring a new CEO (this time from the private sector)and recompose its Board of Directors with highly distinguished personalities. Whata revolution! What a courageous and ingenious move! If MoCA indeed had a planfor the future of AI, which I doubt, let's agree that floating the airline through anIPO type of procedure seems a very remote option. No need to keep fooling the

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